Nick Clegg will issue a blunt warning to Britain's state-controlled banks that they will face tough restrictions if they attempt to introduce "irresponsible payments" during the forthcoming bonus season.

Osborne is expected to say that Britain needs a settlement with the City that would keep London as a global financial centre without putting the rest of the economy at risk.

The chancellor is also likely to argue that competition in retail banking is increasing after the £750m sale of Northern Rock to Virgin Money and the Co-operative emerging as a force in British banking after it was named as preferred bidder for the 632 branches that Lloyds Banking Group has been forced to sell by European regulators.

Tough stance

Clegg will make clear the government will take a tough stance if the state-controlled banks – Royal Bank of Scotland and Lloyds – pay generous bonuses in the forthcoming bonus season. The deputy prime minister will tell the Demos think tank: "The profound impact of the banking implosion on our economy, and on our society, has since become even clearer. There has been no lessening of public anger towards the banks – and there will be no let-up in the government's determination to keep the clamps on bonus payments. So, on the eve of bonus season, let no one be in no doubt about our determination to use our clout as the major shareholder in these banks to block any irresponsible payments, or any rewards for failure."

Ministers are about to embark on negotiations on how to curtail bonuses in the state-controlled banks. Clegg is confident that the government will repeat last year's restrictions if the banks refuse to fall into line. These saw a shrinking of the bonus pools at RBS and Lloyds; the payment of all bonuses to chief executives and executive directors in deferred shares; and a £2,000 limit on cash bonuses.

Cable said the banking industry should brace itself for "big structural reform" as the government prepares legislation to implement the Vickers reforms by the end of this parliament. "The government is going to launch this initiative on the banks, accepting in full the Vickers commission," he said. "We're going to proceed with the separation of the banks – the casinos and the retail, business lending parts of the banks ... Moreover we're going to get on with it. Both the primary and secondary legislation is going to be completed within this parliament. It's got to be done. We can't have a position where the big banks are too big to fail."

The Vickers commission's recommendations were announced in September and the chancellor said then that legislation would be passed before the next parliament, but added that he would also stick to the timeframe set out by Vickers, who argued banks needed until 2019 for full adoption of the plans. The date coincides with deadlines for further international banking regulations.

Lord Oakeshott, the Lib Dem former Treasury spokesman, called the adoption of recommendations "a triumph for the Liberal Democrats, and Cable, and the whole country". He added that the proposals do not go as far as the full-scale split between high street and investment banks which Cable called for in opposition.

No more bailouts

The commission is convinced that ringfencing – which forces the banks to put high street banking into a separate legal subsidiary that will have to hold capital of at least 10% – is a more practical way of ensuring there will never be another taxpayer bailout of banks.

For Labour, Chris Leslie, the shadow financial secretary to the Treasury, said: "There must be no foot dragging and no watering down of these reforms. That is why the independent commission should be asked to publish a report in 12 months on what progress has been made in implementing and legislating for these reforms."

However, there are more strident views, many contained in a broad collection of essays on the Vickers report published by the Centre for the Study of Financial Innovation thinktank.

One, written by Stani Yassukovich, a former investment banker and one-time head of the predecessor to the Financial Services Authority, the Securities and Futures Authority, argues: "Following publication, we can expect the lobbying [of government by the banks] to reach fever pitch. Of course, in the real world, one would expect the views of those responsible for the mess prompting the reform to be heavily discounted by those responsible for executing the reform.

"But politics and the real world have little in common. Since the political class has a lamentable lack of understanding of how finance actually works, it is forced to rely on advice from roughly the same crew that sank the ship in the first place, in determining how the ship should be remodelled."

Bankers' view

Preparing a green and then a white paper will take several months, so bankers are expected to make fresh attempts to persuade the government to soften some of the recommendations, which include plans to force banks to set aside more cash to cushion the blow of potential losses or future financial crises. One of the most contentious areas is the flexibility around what sits inside the ringfence.

Vickers is clear that deposits and overdrafts of retail customers and small businesses should be inside, with wholesale and investment banking operations, such as derivatives, outside. Even so, it looks as though it will be up to the banks to decide whether to put their large, non-financial, corporate clients inside the ringfence.

Tony Greenham, head of finance and business at thinktank the New Economics Foundation, said: "As Vince Cable himself acknowledged in July, the ringfence proposed by Vickers will not be as effective as a full separation of retail and investment banking.

"The flexible ringfence proposed by Vickers will give banks too much room for manoeuvre and could prove a regulatory nightmare to enforce. 2019 is a long time to wait for these reforms and leaves the public exposed in the increasingly likely event of another financial crash – we might have to bail banks out again. It also gives banks years to lobby for laws to be watered down even further."

The banks say they are braced for the government to implement the plans but argue that the estimated costs, of £4bn to £7bn, are too low, and could be closer to £12bn.

The new legislation is also expected to heighten suggestions from banks, particularly HSBC, that they might move their head offices away from London, with the implied threat of fewer UK jobs and tax revenues.

The independent commission on banking was chaired by Vickers, a former head of the Office of Fair Trading, and was set up by the government last year to conduct a full review of the sector after the financial crisis four years ago left banks including Royal Bank of Scotland and Lloyds needing bailouts.

A spokeswoman for the British Bankers' Association said: "It is widely accepted that ringfencing, in some form, is going to happen. The banks are working through that." Would the BBA continue to lobby the government on Vickers? "Yes, we will. But not in an obstructive way. But in a way that works in the best interests of the City and the UK economy."